Reducing Litigation Risk Through Transaction Independence: Takeaways From Tribune's Two-Step LBO

The failure of a leveraged buyout (LBO) can result in complex, years-long litigation. Issues involving the debtor's solvency and the "collapse doctrine" are often at the heart of an LBO litigation. Under the collapse doctrine, "multilateral transactions may under appropriate circumstances be 'collapsed' and treated as phases of a single transaction for analysis."¹ The doctrine "finds its most frequent application to lenders who have financed [LBOs] of companies that subsequently become insolvent."² A recent decision from the U.S. District Court for the Southern District of New York, dismissing claims for breach of fiduciary duty arising from Tribune Co.'s LBO in 2007, addresses these issues and provides useful guidance on structuring leveraged transactions and litigating LBO-related claims.